In the early exchanges on the referendum, the No Campaign made some noise by claiming that Scotland would be forced to adopt the euro and that the UK Government would refuse to let Scotland, as an independent country, use the pound (sterling) as its currency. It remains one of the major questions I am asked when giving talks on the economics of independence but, the plain fact is that neither the EU, the UK Government, or the Bank of England has the ability to affect those outcomes.

No Euro, even if we wanted to

In order to adopt the euro a country needs its currency to be committed to the Exchange Rate Mechanism (ERM) for two years. Scotland doesn’t have a currency to commit to the ERM, and as Scotland plans to keep the pound, we therefore cannot adopt the euro, even if we wanted to, and so certainly can’t be forced to either.

Not really independent?

It has been argued that Scotland wouldn’t be independent if we kept the pound, however, France, Germany, The Netherlands, Belgium etc have a shared currency and are independent of each other – the list is almost endless. Although Scotland wouldn’t be able to set independent interest rates, all the other more easily utilised fiscal tools would be available to the Scottish Government, and the joint interest rate would also help the English and other home nation economies.

The Scottish Government’s Fiscal Commission Working Group of leading economists, including former White House Chief Economic Adviser Professor Joe Stiglitz, has said that Scotland can agree to currency zone financial parameters the type of which any financially prudent developed nation should have following the lessons of the financial crisis but which do not mean a lack of flexibility to grow the Scottish economy.

Sterling is a fully convertible currency, this means that if any country in the world wants to use sterling it can. Examples of a fully convertible currency being used by other nations include Panama and El Salvador using the US dollar. Using the pound for a period, is a well proven route for countries leaving British rule (New Zealand/Ireland/Australia etc). However Scotland’s right to use sterling is stronger than other countries due to the fact that Scotland owns a population percentage share of the Bank of England (BOE), and so we will just be using a currency and services of a bank that we part-own with the other UK countries. So all that is being proposed is that Scotland will maintain the currency union that we joined hundreds of years ago and still works whilst leaving the political one that doesn’t.

But why use the pound rather than launch our own currency?

I was one of the first economists to suggest this, and agree with the Scottish Government policy. Like most people my heart says launch a Scottish currency, but my head says keep the pound, at least for a transition period – here is why:

The other home nations will, after independence become our largest export market. It makes sense not to put a currency barrier in way of trade. The No campaign is trying to get us to vote against a form of independence (they call it separation) which isn’t on the ballot paper. My independence, the Yes campaigns independence, and the SNP’s independence, is one that maintains the appropriate levels of economic interconnectivity, interdependence and social, cultural and yes – currency ties. Crucially, however, we will be making those decisions to share services as a sovereign country because we believe it to be in our interests. We’ll be making the choice, not London, and we can change our choices when we want.

Why a shared currency?

A Scottish pound would likely be a very strong currency – with oil, gas and renewables, a smallish population, a strong balance of payments, a far better financial position versus rest of UK and an almost guaranteed AAA credit rating. This would mean that the Scottish pound would buy a lot of rUK pounds, a lot of Euros and Dollars etc.

This would mean that for a short time imports would be cheap, the finance industry would grow and holidays would be cheap. Unfortunately this would mean that England, the other home nations and most of the rest of the world couldn’t afford our food, whisky, oil technologies, energy or even services, so we would risk a significant downside to our exporting industries with our own currency.

Why not just devalue?

It has been tried, and Switzerland in particular with all of its financial muscle has been unable to stop the rise in its currency. Uruguay the ‘Switzerland of South America’ has been devaluing to keep its currency a pace with its largest trading partner, Argentina, but Argentinas over reliance on quantitive easing (printing new money) to buy dollars, is in danger of weakening the currency and creating inflation in a low growth economy (stagflation). My point: large scale currency manipulation exercises no longer work, they are a thing of the past, globalisation of markets has diminished any governments power to manipulate currency values.

Many people think that quantitive easing is a great way to increase the money supply, but it amounts to less than 3% of new money created in the UK (so has a limited effect) and strangely, still has an oversized inflationary pressure attached to the practice. Controlling fiscal policy is very different to economic policy – devaluing the currency and setting interest rates are blunt tools, but more targeted economic levers such as reducing landfill taxes, corporation tax, air passenger duty etc, can be targeted in support of specific economic policies and that is why not launching our own currency has no relevance to being truly independent or not.

Plan A (keeping the pound) as set out by the Scottish Government is better for all concerned within the UK as long as both sides reach an amicable agreement. However as a plan B, launching our own currency and devaluing if required is a credible option and over a period of time may well become the best option.

Our friends and neighbours

The rest of the UK has a massive balance of payments deficit problem, we buy in too much, and export too little – this is a hangover from decades of keeping the pound strong for the finance industry, the all eggs in one basket strategy.

A few months ago I did some work that compared the deficits as a percentage of GDP in 2011 (last reliable figures available). Using an average of Eurostat, IMF and CIA projections it was found that out of 170 sovereign states the UK debt level (the amount spent in the UK more than was raised in taxes) was poorly placed at 150th.

The really bad news is the UK is 188th out of 192 nations in terms of the strength of its current account balance. We have a critical balance of payments problem that is in danger of sinking the UK economy without a trace. That is a direct result of keeping the pound strong to help the finance industry (predominately based around the city of London) and this also led to deindustrialisation in Scotland and the UK regions. In 2007 and 2008 I met with Bank of England representatives including Monitory Policy Committee (MPC) members and urged them to curb the excess lending from the finance industry. I was told in no uncertain terms that, Scotland had never had it so good. The words eye, off, and the ball, come to mind.

Upsetting the balance

If you were to take oil, whisky and food exports out of the sterling zone, the balance of trade deficit could cause sterling to sink like a stone, and so would the English economy. Not only would that be bad for Scotland, but it would be bad for our friends in England and that is reason enough – we will still be from Britain (it is an island) after independence, and England will probably always remain our best friend, and trading partner. The rUK would also need to purchase between 30-40% of its energy from Scotland (oil and gas included) and if those trades were from sterling into another currency zone, then there would be no benefit from buying from Scotland, and not another EU country (especially after the EU super-grid has been completed).

Who owns sterling?

So if we keep the pound and the Bank of England (which under international law an independent Scotland owns roughly 9% of) we would leave the ability to set interest rates to keep inflation low with the BOE, it is generally considered a good thing to have similar levels of inflation and the same currency as your trading partners. But roughly 90% of the economic policy levers we would differentiate from the UK would move into Scotland’s control (we already have the rest via devolution).

Equally the UK Government and the Bank of England, in the event of independence, would naturally want what is best for the UK sterling zone and its citizens and would want (actually need) the backing for sterling that Scottish oil and other exports would provide. But, crucially in this new scenario, all of the effective fiscal and economic levers that we might want to vary, would be under the control of the independent Scottish Government.

Conclusion

Keeping the Bank of England, and the pound sterling, still gives us a choice to launch our own currency in the future should that be the right decision. Interestingly we don’t have the option to join the Euro (if we ever wanted to) until our own Scottish currency has been launched and has participated in the exchange rate mechanism for at least two years, but remember you can’t be formed in.

So, far from the scare story of being forced to join the Euro, we couldn’t join, even if we wanted to. Launching our own currency would be more costly and more difficult than agreeing a currency union at the outset of independence, but it would also upset the trade balance with our friends in the rest of the UK by making cross border trades also a cross currency trade. If this damages the rUK economy then that isn’t in the rest of the UK’s best interest, but could be compensated for within Scotland’s economy with the additional fiscal tools that our own currency would bring independence can be a boost to all the nations of the UK economically and democratically.

The economists who work for the UK Government and in the treasury know all of this, and would move heaven and earth to ensure an independent Scotland kept the pound – everything else is just political manoeuvring in the hope of maintaining control of Scottish taxation at Westminster but worse case scenario is the benefits of our own currency could outweigh the transitional issues.

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Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before joining Business for Scotland full time first as its MD and then CEO he ran a small social media and sales & marketing consultancy.
With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).
Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

Writing after the long awaited WP, it is plain that the SNP have ignored one vital issue when it comes to the pound. The current WM govnt have no mandate to allow a breakaway Scotland to use the pound – there would have to be a UK referendum and I believe the resounding response would be no. Why would the rest of the UK want to support an independent Scotland and why would they even consider taking the risks that this alliance might bring – taking into consideration our reputation with Sir Fred, RBS etc etc? It’s a great shame as I think Scotland would do better as Scotland – Salmond is essentially a light weight when it comes to the real issues and he has been found badly wanting on this one. Saying something over and over again (Scotland will have the pound ….Scotland will have the ……)does not make it so.

While the ideas set up above are all very good and it would be a safe stable way to take the country through its first few years I’am dissmayed at several points

1.We should go it alone completely not still attached to rUK banking system which has been the for the most part the problem for our economey as pointed out in the artical.

2.To the author, You say that the QE done by the BoE is only 3% of money creation where does the other 97% come. As i believe it to come from high street banks and the fact that when they lend money to you they create it out of thin air bassed on nothing backed by nothing. I’am willing to be corrected here but is it not the case that under the currant model we will never be able to pay back the debt because on the most basic level for every £1 created and put into the sytem we owe £2 (i understand that it is not as exact as a doubling but the just of it is that there is more debt than money)

3. By staying in a currancy union we would leave control over who gets to print the money with England.
Now they print a £20 note sell it to us for £20 we pay £20 out of OUR taxes and it cost rUK about 1p to make it so why would we want to do that?

4.The fiat money that we rely on needs to be destroyed we must come up with a new economic model one that is fair and balanced for all peoples of Scotland not just the same system under a diffrent flag. If the Indy Ref is to mean true change then we must break the financial hold the banks have over our entire lives. Afterall it is our entire lives that are ruled by money. From the milk we buy, to price we pay for oil, to the pensions and schools, the army and the job centres everything revolves around money and if we choose to be free we must be free from this most of all. We must cut ties to the most corrupt orginisations and bring back in to public hands the services that are for the public not for profit.

We must strive to futher humanity by providing our scoity with the ability to move forward to do this we must first erradicate the obstacles which blight our daily lives by providing everybody with free Power because nobody should freeze to death in their home, free Education because nobdoy should be denied the right to learn and therefore contribute to the betterment of the next generation, free Food because nobody should starve, free Halth care because nobody should be denined the right to a healthy life, these are the things that will set us on a path to a better world. These may seem like pipe dreams to many but it can be done if we all just try.

The Sterling union idea mooted seems to rely (according to the Scottish government’s working party) on both governments agreeing to certain overarching deficit limits (and other limits). I see zero chance of the rUK government accepting any such limits. Also no parliament is permitted to bind a later parliament, so even if the rUK government did agree to such limits then a later one could tear up the agreement at a moment’s notice (eg in time of war).

Secondly, I’m not 100% sure that the rUK wouldn’t welcome the devaluation that decoupling from Scotland’s oil reserves would/ could lead to. After all, that’s what QE was designed to acheive. Why would rUK want a currency that was artificially inflated above what was ‘right’ for the rUK, without having access to the tax revenues?

In summary, the mechanism for getting out deoesn’t matter – I don’t see the rUK government agreeing to a proposal that is so heavily NOT in the interests of the rUK.

Gareth The decoupling would not just be from Scotland north Sea oil revenues – they impact on Scotland economy is massively over estimated by the No campaign. Its good bonus to have but Scotland economy is robust and crosses many sectors. The decoupling would also be from Scotland renewable energy potential, Scottish tourism’s foreign exchange generation, whisky and food exports and manufacturing export that are way higher per head than the rest of the UK. So yes there would be a devaluation but that is not something that would be welcomed by rUK.

For a start the political fall out from foreign holidays becoming much more expensive could be more potent than the economic impact in terms of public perception. Secondly the imports that the rUK replies on to fuel retail performance would become far more expensive to buy in and would lead t rapid inflation. Raising interest rates to control inflation is not really a tool that is available to the BOE as so many people are 1% interest away from bankruptcy in the UK hence the BoE Governor saying no rate raises for 3 years – I say 10 and stagflation is on the way for UK.

Finally what manufacturing does happen in the rUK is not wholly sourced from here, generally people think a high currency is bad for exporting but after years of a strong pound only added value manufacturing takes place here and the strong pound keep the foreign made components prices down. If Sterling dropped in value then manufacturing would see imported component prices go through the roof and good-by rUK manufacturing.

The UK should have devalued in the 80s and tried to maintain manufacturing but that option isn’t available now.

Great article. I agree when you make the point that changing the governance structures is what’s needed first, not necessarily rushing into a currency change which can have sweeping and unintended consequences at a global level.

But to gain control over those levers of change there is something far more fundamental that your article barely touches on. We need to undestand how money is created and have the levers to be able to reform the money creation system. Without these levers we are not truly responsible for our own destiny.

The reason public money such as Quantitative Easing (QE aka. government money printing by BoE) only accounts for 3% of our money supply is that 97% of money is created by private banks. The profits from this money creation (Seigniorage) remain in those banks rather than being used to pay to create public value or new productive resources such as business startups and expansion.

It’s not until we are in a position to tweak or reform 100% of money creation that we will have the levers of economic control you mention. 3% is inconsequential whether it’s in BoE or in a Scottish central bank.

It should also be recognised that by Scottish oil hardening the pound and sharing the benefits across the whole UK there are additional risks. We can’t hope to prop up the whole UK and should the rUK economy tank anyway, Scotland will act in its best interest by pulling out of Sterling. The timing will (rightly) be seen as a betrayal.

Better would be to launch a Scottish “Pint” asap and peg it 1:1 to Sterling. That way Sterling still benefits from hardening from our oil, and trade will be as easy as today, but the levers are very clearly in place. Meantime Scottish public finances will benefit 100% from the additional money we will need to print to keep our currency down. Your points that this policy doesn’t work are not substantiated by the example of Uruguay and Argentina. Uruguay has been going from strength to strength in the last decade while devaluing its currency. The problem is in Argentina and stems from its low growth because like the UK its QE policy is designed to fix the financial economy not stimulate the productive economy. But that’s just a policy decision and can easily be changed with the political will to do so.

So in short I’d propose the following steps following full parliamentary independence:
1. Launching the Scottish Pint 😉 pegged 1:1 to Sterling. All profits from Scottish central bank seiniorage to be directed to the creation and expansion of the productive economy (ie. job creation, startups and innovation!)
2. An end to private bank money creation (ie. full reserve banking).

It is only when 1. has been implemented that we will have a comfotable grasp of the levers of control you claim will belong to the nation after independence.

In tandem with this we will need to strengthen our democratic structures so we can have maximum effectiveness in deciding what to do with annual cash surpluses into the billions (on today’s spending figures) when we implement full reserve banking.

I am not in favour of maintaining any ties with the City of London, and that includes currency – even though I also accept the logic of the arguments above. I suspect we will end up adopting the Euro eventually (years/decades? not sure).

However, I think the fundamental point here is that a little as possible should be ‘bundled in’ with the Yes/No vote. The choice of currency should be made after 2014, just like any other major national factors.

At last real, reliable information is coming out DESPITE the press and the BBC. This is the second interesting and informative article I have read in two days on the subject, (see George Kerevan, Currency Wars in Newsnet Scotland). Alas we have only 16 months left to educate and inform a population that in the main hate change and have seldom voted from an informed position. Hey,if we had a better informed electorate the UK wouldn’t have got into the mess it is in……

Paper money is worthless, it’s printed only when banks see enough people in debt to pay them interest. Interest is ruining businesses and lives. We should do as Gadaffi tried to do and launch our own currency based on our natural resources. Gadaffi choses gold we could use water as ur main export giving our currency REAL value.

I apologise for being a rather elderly Mrs Housewife who struggles to understand the machinations of finance. However one thing that struck me in all this was/is the fact that Scotland owns 9 percent of the Bank of England. So what does that mean in real terms if we decide to go for our own currency can we take our 9 percent with us and use it, in simple terms say, as a deposit.?

“Finally it has been argued that Scotland wouldn’t be independent if we kept the pound, however, France, Germany, The Netherlands, Belgium etc have a shared currency and are independent of each other”

Yes, the rich northern European countries have done rather well out of the union, but what about Greece, Spain, Portugal, Italy and Ireland? Their inability to control their own interest rates have meant that they have been unable to respond adequately with deficit spending to the failure of aggregate demand resulting from the financial crisis. The currency union has essentially crippled their ability to use effective fiscal policy. Other examples of countries using pegged currencies don’t really fill one with confidence either – Argentina before it dropped its peg against the dollar would be one example.

My apologies for this time lag – I have only just had this interesting site pointed out to me.
This article is an erudite dissertation on the currency options for Independence. It is however a narrow view of these options – a view conditioned by the conventional economic paradigms which have sled to our present economic and financial paralysis. If we insist upon plying this real life game of Monopoly with the bank participating as a competing player then we shall all continue to lose.
At present we have mega-banks which exist first to make profit s and bonuses and – a long way down the priority list, to provide a means of exchanging goods and services among the community. The author states “globalization of markets has diminished any governments power to manipulate currency values”. If that is set in stone and incapable of being challenged then there is little point in independence, democracy or hope for the future of the human race. That said there are realistic options being promoted by many groups throughout the world – and there is at least one tailored for an independent Scotland.
Briefly it is for our own currency, and Central Bank pegged to Sterling for a short period and the rate of exchange also pegged to all other foreign currencies in association with our balance of trade. The benefits of this far outweigh any minor inconvenience of arbitrage or forex for trade settlements Perhaps most importantly it enables us to conduct our own bank regulation.
This debate needs to be opened up and is expanded in a short article on Bella Caledonia –http://bellacaledonia.org.uk/2013/04/15/are-ye-no-feart/

Why not skip the pound and revert to either the Scottish Merk (if we want to align ourselves with our European cousins) or the Scottish Dollar (if we want to signal to our North American friends). The pound is so tied up with the Union that a trusty Scottish Merk or Dollar would be a great signal of our true independence.